Let’s start with a basic assertion; the cryptocurrency space has always been a particularly volatile entity, with the market leading token Bitcoin (BTC) embodying this perfectly.
From its early days as the chosen payment method for illicit purchases, BTC has embarked on numerous bull and bear runs, the most recent of which saw its price crash through the $60,000 barrier in mid-April before shelving almost 50% of its value in barely six weeks.
Of course, BTC is one the rise once again, but why are crypto assets of this type so volatile and can this be beneficial to traders? Let’s find out.
Can Crypto Volatility be Positive?
In simple terms, the volatility of an asset describes the rate at which its price swings up and down within a predetermined period of time.
This affects all assets, of course, but the extent of said price changes is marked in the crypto space and can make it hard for tokens like BTC to perform the various functions of a normal currency.
However, volatility can be positive from the perspective of investors, especially those who look to ‘short’ crypto assets by utilising leverage and BTC margin trading.
But Why Exactly is BTC and Crypto so Volatile?
While we may now know that it’s possible to leverage crypto volatility to your advantage, the question that remains is what makes assets such as BTC so unpredictable in the first place? Here are some factors to keep in mind:
Bad News Huts the Adoption Rate
As BTC is a virtual asset that has no tangible or physical store of wealth, it’s incredibly vulnerable to bad news and negative geopolitical events. This was borne out recently, when the decision of Tesla CEO Elon Musk to criticise BTC’s mining processes precipitated the crypto bear run that began in April. The entrepreneur had previously procured $1.5 billion worth of tokens and helped the asset achieve record price highs, so it’s clearly susceptible to highly publicised news events and opinions.
BTC’s Perceived Value Sways
Another reason why BTC in particular fluctuates against fiat currencies in the perceived store of value against said currencies. For example, Bitcoin has qualities that are similar to gold, especially in terms of its finite supply and relative immunity to macroeconomic factors. As a result, investors often choose between fiat currencies and crypto assets, causing sudden price swings as the market continues to shift.
Uncertainty of Bitcoin’s Future Value
BTC volatility is also driven in part by the varying perceptions of the intrinsic value of the asset (and similar alt coins) as a viable store of value and method of value transfer. A store of value is the function by which an asset can be useful in the future with some predictability, and the long-term uncertainty surrounding BTC continues to undermine the asset’s price stability.